9309979 Leahy Questions concerning the dynamics of aggregate variables such as prices, employment, investment, and consumption represent the core of business cycle analysis. One striking feature of these variables is the radical difference between properties of these aggregates and the nature of the individual behavior that underlies them. The behavior of a firm's prices, investment, and employment, and the behavior of an individual's consumption all involve frictional elements that lead to inertia at the microeconomic level. Heterogeneity among individuals, however, tends to smooth the behavior of the corresponding aggregates. Yet, in spite of their apparent continuity, these aggregates are in the end the sum of their parts. They therefore inherit certain properties from the behavior components. Renewed funding will continue this research on the precise way in which microeconomic frictions influence aggregates. Previous work focussed on theoretical issues involved with the introduction of informational considerations into the field of aggregation. The current project will pursue empirical approaches to aggregation using a unique data set on mortgage refinancing that is particularly well suited to the study of aggregation. The project also develops new theoretical ideas and tests the applicability of the theoretical research with data from specific historical episodes such as the Latin American debt crisis of the early 1980's. The project also develops a model of monetary policy formulation in the presence of adjustment costs and imperfect information. The model permits rigorous analysis of the issues involved in choosing between a gradualist and a more aggressive approach to monetary policy. The results will shed light on the nature of recent U.S. monetary policy and have lessons for a wide range of other policy issues. ***
